Digital revolution in business relations (part 3)

Transaction’s digitalization and Digital revolution

Certainly, blockchain has made revolution in business relations. Below are some facts as a prove of it:

  •  Low transaction commission of blockchain enabled to efficiently manage working capital of several firms which are involved in business relations. This has sharply speeded up and reduced transaction’s cost between firms.
  • Smart contracts contain transaction’s information available for processing, as well as the ability to take into account complex transaction systems between firms. So smart contract’s creation has simplified long transactions with the account of firms located far from the place of network where transactions are carried out. This has increased systemic coherence of firms as well as their understanding of firms’ interdependence and risks. The main thing is that firms got an understanding that their informational transparency allows real risks to be considered, to increase planning’s horizon, to forecast money inflow, to count domestic investments’ scales and innovation’s activity. Shortly speaking, activities’ coherence and informational transparency among all network’s participants of firms turned out to be more beneficial than informational activity.
  • Blockchain has also become an excellent and much cheaper mean for certifying fact of transaction.
  • It should be mentioned that smart contracts help collecting production data. Namely data on actual orders, time and quality of implementation, etc.) Processing of this information will allow to make more balanced decisions.

All of these factors will lead to a revolution in business relations. The ability to coordinate within networks of interacting firms will result in a sharp reduction of transaction costs. But primarily all this will effect regulations in assessing shareholder’s value of entrepreneurs’ assets.

Shareholder value of production assets, assets’ networks, transactions

The most interesting effect is a significant reduction of uncertainty in future cash flows due to harmonization of information, transactions and activities of firms.

Let’s imagine a firm that produces intermediate goods to several customers. Its cash flow depends on customer firm’s success. If customer’s firms have their own customers and they have their risks, then innumerable factors influence success of our firm. At present time, firm that produces intermediate products doesn’t know what is exactly happening in firm’s network that provide it with orders and money. As a result, to predict its cash flow is extremely difficult.

And then imagine our firm being informed about all network’s activities, but at the same time with this information it concludes smart contracts. This will significantly improve firm’s efficiency and reduce its risks. Moreover, such an approach will help to estimate aggregate shareholder value of the entire firms’ network, and therefore agree on specific cash flow transactions, taking into account the real impact of these transactions on the firm's value. And what does this mean? Just imagine the situation: you are starting a long-term work under smart contract. It immediately allows you to assess how the achieved results will affect value of your asset and value's likelihood increases in view of risks. In addition you will be able to see how same function, but in an another planned networks affects your value and also you will be able to choose both the conditions and the most profitable networks for you.

Such shareholder value’s creation would dramatically reduce investment errors’ cost, and therefore appropriately redistribute investment capital.


Digital revolution in business relations (part 2)

Digital revolution in business relations  (part 1)


Article by Andrey Miroshnichenko, Translated by Elena Krasovskaya.